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Colgate (CL) to Expand Skin Care Range With Filorga Buyout

After reaching the pinnacle in oral-care business, Colgate-Palmolive’s CL quest for expanding in the high-margin personal care business brings another premium skin care range into its portfolio. The company agreed to buy the skin care business of France-based Laboratoires Filorga Cosmétiques (Filorga). The deal has been finalized for €1,495.5 million (US$1,690 million).

Sold in more than 60 countries, Filorga’s products mainly focus on facial care. This anti-aging skin care brand has its largest markets in France, Italy, Spain and Greater China. The brand is sold through a multi-channel distribution strategy, with supplies across pharmacy, online, specialty stores and travel retail.

With this acquisition, Colgate will take aboard a leading premium skin care brand, which will bring it high-growth, profitable, global skin care asset. The company is likely to benefit from the Filorga brand’s strong market positioning, with the scope to expand further through improved distribution and marketing. Moreover, this acquisition will mark Colgate’s entry into the fast-growing travel retail channel, particularly in Asia.

As part of its efforts to expand its personal care portfolio, the company acquired two professional skin care brands like PCA Skin and EltaMD in 2017. PCA Skin provides medical-grade in-office and take-home skin care products. The brand is also supported by highly professional dermatologists, plastic surgeons and aestheticians. EltaMD is a leader in physician-dispensed sun care services. Going forward, Colgate is likely to increase investments in professional skin care businesses — Elta MD and PCA Skin — in spas and dermatologists.

Coming back to Filorga, Colgate expects to finance the deal through cash and debt. It expects to close the transaction in third-quarter 2019, following the satisfaction of customary conditions and receiving the required regulatory approvals. However, the company does not expect the acquisition to influence its earnings in 2019.

We note that Colgate expects to improve organic sales in 2019 through accelerated investments in brands, strong innovation, and expansion in new markets and channels. For this, the company is focused on increasing the availability of its products through enhanced distribution to newer markets and channels. It is aggressively expanding into faster-growth channels while also extending the geographic footprint of its brands.

Apart from investments in Elta MD and PCA Skin, the company plans to expand the portfolio by introducing pharmacy brands like Elmex and Meridol to newer markets in 2019. It is also expanding e-commerce offerings, with the launch of Hill’s to home, which significantly exceeded subscription targets in the first quarter. This platform will enable pet parents to purchase prescription diet products directly from their veterinarian, with home delivery option. This should enable it to deliver strong e-commerce growth in 2019. All these actions are likely to drive solid top-line growth in 2019.

Backed by its continued efforts, this Zacks Rank #3 (Hold) stock has gained nearly 24.2% year to date compared with the industry’s growth of 19.7%.

However, the company is plagued with soft margins and currency headwinds for a while now. Increased raw material and packaging costs as well as higher SG&A expenses are likely to hurt margins throughout 2019. Further, adverse currency should mar earnings and sales in 2019.

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